What The Fiscal Cliff Deal Means For Your Taxes

A month ago, all everyone was hearing about was this darn fiscal cliff. Are we gonna go off the cliff? Are taxes going up? Going down? What exactly is Congress doing up there on that hill? Is the world going to end as we know it?!

Phew, it was quite a confusing and stressful time! The good news is that we have not gone over the fiscal cliff – thanks to a last-minute deal that Congress pulled off.

But what does that even mean? Here’s a breakdown in simple terms to help you out:

Increased Payroll Taxes

You may have already noticed that your paychecks are a little bit lighter this year. That’s because of an increase in wages-earned (or payroll) taxes.

If your family earns more — like $100,00 per year — you’ll be paying an extra $2,000 per year, or an extra $165 per month – roughly.

Wealthy Tax Payers

Some wealthy tax payers – those who earn $400,000 or more – will see their tax rate increase from 35 percent to 39.6 percent. The capital gains tax rate will increase from 15 percent to 20 percent for those wealthy taxpayers, too.

These credits specifically benefit low and middle class taxpayers. Some of the credits include Child Tax Credit, Child and Dependent Care Credit, The American Opportunity Tax Credit, the Earned Income Tax Credit.

Sequestration

If you’re a government worker or married to a government worker (or supported by a government worker!), you know that many federal employees are on pins and needles right now, wondering if they’ll have a job for the rest of the year.

The sequestration – which is a large amount of federal budget cuts – is an attempt to take control over our exploding deficit. Congress was supposed to make a decision on whether to sign off on $1.2 billion in cuts over the next 10 years (50 percent of domestic spending and 50 percent of defense spending) on January 2nd, but pushed the decision back to March 1st.

Many government agencies are determining their own budgets based on the cuts, and federal employees may very well be affected by those cuts. Furloughs are a popular term right now. Cutting salaries and expense through attrition (e.g. not replacing an employee when they retire) is another idea.

It’s clear that our country needs massive budget cuts and, right now, that’s all in Congress’ hands. Come March 1st, we will have a better idea just how these cuts affect our country and the federal workforce.

Comments

One important distinction: SS taxes didn’t technically increase. A temporary reduction of the required contribution (I think it was part of the stimulus in 2011) expired at the end of 2012 and was not extended by Congress.

Also note that higher income taxpayers must also start paying a 3.8% additional tax on net investment income to the extent certain threshold amounts of income are exceeded ($200k for single filers, $250k for joint returns, etc). Therefore, taxpayers within the NII surtax range must pay the additional 3.8% on capital gain, whether long term or short term. Thus the effective top rate for net capital gains is 23.8% for LTCG and 43.4% for STCG.

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